Good morning, everybody. My name is Bill Mays, and I want to welcome you to Establishing an Effective Parts and Service Department. Or should I say, Bienvenidos a Establishing an Effective Parts and Service Department porque I see that we have some people that may be more international on here. This is going to be in English just in case any of you are wondering, but si necesitas que yo pueda hablar en español to answer your questions, we can switch over to Spanish. So what I would like to do here is give you just a little bit of background as we get going in this. If you put about an hour aside for this, that's going to be sufficient. And I've got enough material to go that and more, or we can go 45 minutes. What I'd like to do is make this as interactive as you want it to be. If you've done these webinars before, you know that you can ask questions. This is a live interactive. This is not recording. I'm sitting here right now talking to you live from Costa Rica, actually. So anyway, the beauty of modern technology. My name is Bill Mays. I had a career with John Deere in all the departments. I left John Deere to go to Case and then became CNH, ran product support for the construction division of Case for a number of years, was global as a service marketing director, left the large corporate world to buy into a rental fleet and ran and operated the operations and service and parts side of machine rooming for seven or eight years before I decided to do some other things with my life. So I've got a lot of experience and can answer a lot of questions. Like I say, this is as interactive as you want. So just what I'd have you do is mute your microphone now just in case you are talking. I won't pick it up and it won't interfere with the recording of this webinar. But if you want to ask a question, just unmute your mic, click on, and either I or Rebecca at AED will pick up the question. Or you can send us a question via chat and we'll answer it. So that being said, let's get going. In this webinar, like we wrote when we put out, you're going to know what, or after it, you're going to know what KPIs to achieve, KPIs are key performance indicators. We want to talk about rigorously implementing disciplined processes. Processes are how you get things done. Make sure that everybody does things the same way, which means that it gets accounted for the same way. But more importantly, it means that the customer sees the same activities from you and you have fewer mistakes when you have good processes in place. We want to place a high importance on hiring, developing, and training, and retaining the best people because it's really all about the people. At the end of this, we expect you to be able to interact with people on your key performance indicators, KPIs as we call them. And this is going to be your financial benchmarks. What is a KPI? It's a financial or operational benchmark that you can use to guide and judge your performance. So you want to use it for two reasons. One, you want to use it for yourself. You want to use it to see how you're doing in performance or what you think you should be doing, whether it's your budget or whether it be an indicator, one of the KPIs we're going to talk about. And you want to be able to judge your own performance. Are you doing better or worse? Are you on track? Are you not on track? The other thing you can do with a KPI, if you know how it's calculated and if you know how other people are calculating it and it's done the same way, you can compare your performance to the performance of other people, other dealerships, other departments, and you can see how you're doing in comparison with those other people. So let's run down the key ones. This is both for parts and for service. So I'm going to mix it up a little bit here. So if you are leaning one or the other way, just wait. Your side will come up. But it's also good for you to understand, since we're all in this together, how the other department is being measured and what they're being measured against as well. So gross margin in dollars and percentages are gross margins calculated the same for everybody, and we'll get into that. Sales contribution. It's also called sales mix. This is the percentage of your sales that what percentage of the total dealership sales are coming from your department. We'll talk about these individually. Return on assets. This is something that's really done at the dealership level. The assets are everything the dealership owns. And then how much profit are you making? So when you compare your profit to the assets, what is that percentage, and is it sufficient? Turnover. What is turnover? We'll talk about that. But is your turnover sufficient, is it too high, or is it too low? Sales growth. We all expect to grow. We all expect to have more sales next year than this year. That is the plan anyway, and even in a down economy in the parts and service departments, we should be able to obtain at least a level, if not a growth, because we have such low market share in general, there is room for growth even in a down economy. Fill rates and lost sales. This is for parts, but it's going to impact the service department very much because the fill that we get out of the parts department is going to impact the performance that the service department can achieve. Sales per employee. That is a measure that you can use to identify if you've got the right level of sales for the number of employees you have, or vice versa, if you have the right number of employees for the sales volume that you have, and you can use this to compare your dealership to other dealerships. Then one that's extremely important, it's not financial, but it has all the impact on your financials, and that is the Customer Satisfaction Index, or CSI. We'll talk about that specifically as well. And absorption. Absorption has been extremely popular as a subject for probably 30 years or more. I've been preaching this for many years, and it's nice to see that it is more a way of life now than it is an idea. All of you, I'm sure, understand what your absorption is, but we're going to talk about that and what the number should be. So let's get specific then. Let's talk about the parts gross margin. Parts gross margin percentage, that is how many cents of every dollar of sales are left after you pay for the item that you sold. So when you sell something, obviously you had to buy whatever it is you sold. In this case, it's a part. You had to pay for that part. That part then, what you paid for it, is your cost of goods sold. You compare that to what you sold it for, and if you sold it for more than you paid, then you have a positive gross margin dollar. You divide that by your parts sales, and the gross margin, of course, is smaller than the sales. So then you will get a percentage, and that's your gross margin percent in the parts department. It should be 30% or more. Obviously that's going to vary by the type of part, and if you've got a large part, if you've got parts matrixing, and you're pricing, matrixing is just simply a term for saying that a price markup, which is how much margin you're going to put on your parts, markup is meaning you take it from the cost and mark it up, as opposed to margin is taking it from the sales dollar and taking what percentage it is, so you just change your denominator. But 30% is the guideline for a parts gross margin, it's really between 30 and 35%. So what two things can increase your gross margin? Think about it. Let's say you want to volunteer. It's a little hard. You can raise your hand, I will see it here, but you have to click on the raise your hand module, but I'll go ahead and assume you raised your hand and you were correct in your answer. What two things can increase gross margin? One is increasing the value of the sale without increasing the cost of sale, so you'll get more gross margin dollars when you do that, and gross margin percent. The other thing is you can impact the cost side. In the parts department, that would be to take advantage of any programs that the manufacturer OEM offers or any other place that you can buy a part. If you can buy it cheaper, you're paying less for the part and you don't necessarily have to sell it for less just because you paid less, whether it was on a stock order. A lot of you will put your parts on a stock order if you can. One of the things I'm going to do here as we go through this, I'm going to talk a little bit about how you can impact the number, not just what the number is or what it means. Obviously, this is preaching to the choir, to your parts people, but if you can take advantage of a discount, you should take advantage of the discount, except that you don't want to overbuy. What I mean by that, obviously, at certain times of year, the manufacturers have very good programs. I know this because I was one of them and I did that. I could predict essentially how much I was going to increase my sales dollars by the amount of discount I was willing to provide. I always wanted to work with the dealers to make sure that they were able to sell what they bought because it didn't mean no good to be able to load up a dealer with a lot of extra parts that they couldn't sell in whatever program because what you want to do is if you buy on a special program to get a good price, you want to make sure that you have a way to sell those parts and have a program to move those parts out. They work in conjunction with one another. You can either give all the discount away to attract more business and then try to get more business attached to that, or you can give part of the discount away and get yourself an increased gross margin by buying right. That's what you want to do. You want to raise your price if you can, or you want to buy right. Raising your price is one of the ways you do it with matrix pricing and you identify particularly low dollar value parts that you can add an additional margin to, mark them up a little bit beyond the manufacturer's suggested retail to obtain a little bit more margin because it's still going to cost you about the same to pick apart whether it's worth a dollar or whether it's worth $100. So you need to take that into account. Let's talk about the service side then. What is service gross margin? Well the calculation is the same. The calculation means how many cents of every dollar of sales are left after you pay for the item that you sold. What did you sell? You sold labor. So the calculation is service gross margin dollars divided by service sales equals service gross margin per cent. But the service cost of sales is your payroll. You don't have a physical inventory. You don't have parts sitting on the shelf. What you're selling is time. You're selling the time it takes for the service technician to do the work. You can't inventory time. The challenge you've got is you either have to use it or lose it. A parts person has the ability to let that part sit on the shelf another day if they have to and sell it tomorrow. In fact, that's the idea is to have that part on the shelf when the customer comes in and wants it. You and the service department have a different challenge. You have to make sure that you've got people lined out with jobs ahead of them and you want to make sure that they're not waiting on those jobs, that they understand what the next job is so they can move on to that job and not spend any time between jobs because every minute between jobs, unless you're able to slide it on either the prior work order or the next work order, is a lost minute. Those minutes add up. We'll talk about that a little later. Time is your payroll. Time is your cost of sales. Your guideline is a lot higher. It's the highest in the dealership. Your guideline for your gross margin is going to be 60 to 65 per cent. Why is that? Because your wage multiple, which we're really not going to talk a lot about here because that's specifically service, is the comparison between what you sell that hour for, let's say $100, and what you pay for that hour, let's say $25 in payroll. That obviously gives you a high gross margin, but you have high cost and expenses to go with that. At the end of the day, it kind of washes out. What two things can increase your gross margin, dollars and per cent? It's the same thing as in parts. You have to raise the value of the sale without impacting the cost. It means sell it for more, or you have to decrease the cost that you're paying. How do you do that in service? One of the ways you do that is you use a standard charge billing system, a standard charge system or a flat rate system. We don't like to use that because flat rate connotates warranty, which is a challenge for everybody. Customers don't want to pay anything if they think it's warrantable, and you're limited by what you can charge or what you can charge by the manufacturer, so it can be a challenge for you. We'd like to call it standard charge, but that's a billing system where you're going to quote the customer, and then you're going to stick to that quote unless something dramatic happens that you can communicate and renegotiate with the customer. It's a good deal for the customer because they have a price up front, and you're assuming the risk. If it takes more time than that, if you have to give it to someone in the shop that's not as efficient, you're going to eat that time. At the same time, if you can beat that time by a little bit by having a better person do it or just having a good technician get it done right, then you're going to have a little more profit, so you can increase your margin by using a standard charge system. One of the things you want to do, though, to be able to start that and to be able to manage your gross margin in the service department is you want to track your margin daily by total and by technician. You need to have reports that are going to tell you if the technician, how many hours did they bill out each day against how many hours did they get paid for that day. You want to use total hours, whether it be an overtime hour or a regular hour, because you really want to take it back to the hours. We talk about dollars when we're talking finances, but in the service department, you want to think about hours. If you track the hours and if you manage the hours, the dollars are going to fall in place. They're going to follow the hours. Let's have a little quick exercise here with service gross margin. Get your pen and paper handy and do a little math here. We have a technician here or we have a service department here that had sales of a million seven and had salaries of $650,000. What was your gross margin dollar and what was your gross margin percent? Show your calculation. Obviously, I've done this. I do this in seminars and we do it with a workbook and I pause here and let you have a couple of minutes. Here, I've just given you an A, B, C, or D. D, of course, is it says, I don't know because I don't know the cost of sales. Remember, what is your cost of sales in the service department? It is your technician salary, so you do know your cost of sale. It's not D. It's an A, B, or C. I'll give you a hint. It's C. What you want to do is you want to take your sales minus your salaries to get your gross margin. Obviously, I had a math error in one of them and I had a division error in the other one, so C is a gross margin of $1,050,000, which yields 61.8% gross margin, and there you see the calculation. Let's talk about your importance as a parts or service department to the overall dealership enterprise. I want to do this because very often in my career have I seen, in fact, almost always have I seen the dealer principal give more attention, pay more attention to, who do you think, the whole goods or sales department. Why? A number of reasons. One is because the dollars are so high in that department. They have more of their sales dollars there that this is something they have to pay attention to. The OE manufacturers push that because that's how they make their money, by shipping iron out the back door of the factory. If they don't ship iron, new iron, they don't make any money. A dealership can sell used iron, but a manufacturer can't sell used iron unless they have a finance swing and they happen to have some lease returns or they happen to have repossessions. By and large, the majority of them are new iron, so they have to be able to push that out. It's important. It's also high risk because the margins are a lot lower and the dollars are a lot higher. They take a lot of dollars because it's a capital-intensive industry and you have to have a lot of inventory to be able to sell easily, more easily. It's never easy, but to sell more easily, you have to have it on the lot, which means the dealer has to have money invested. We know they're going to pay attention to the holdings department, but take a look at this. When you really pay attention to what's important, what's really important is profit. Profit is what's important. Profit is what pays the bills, not percentage. We get 65% gross margin in the service department, 30% gross margin in the parts department, and 10% or less in the holdings department, an average of 6% on a new sale. What does it really wash out to? I want to show you what weighted gross margin looks like. Let's compare the actual dollars that have been provided by each of these departments. If you take an average sales mix, and this has actually not changed significantly in the last 30 years, let's take the sales department, typically produces about 70% of the total dealership sales. The parts department produces about 20% of the total dealership sales. The service department produces about 10% of the dealership sales, which gives you 100% of the sales. Now, sales department, that would include new, used, and rental. That's what's changed over the last number of years. There's a lot more rental going on than there used to be, but that's just changed the mix a little bit within the sales department. Let's talk about the relative gross margins from each of these. I'm going to bump it up because this 70% includes the used, and used sales are typically considerably higher in gross margin percentage than new. We're going to say we get 10% gross margin on our sales from the whole goods. We're going to get 30% on the sales from parts. That's a little low, 33 to 35 is more average right now, 30 is the benchmark, and 65% on our sales from the service department, from each sale, dollar sales, against the sales in the service department. That's our average gross margins. What is weighted gross margin then? Weighted is then when you take the percentage of sales from each department and multiply it by the gross margin within that same department, then you'll get a weighted gross margin. That is the gross margin, the percentages, that that would be of the total dealership sales. This is the gross margin against the total gross margin of the dealership. What that means is the sales department at 70% of sales and a 10% gross margin has a weighted gross margin of 7%. The parts department at 20% of sales and a 30% gross margin gives you a weighted gross margin of 6%. The service department at 10% of gross sales and 65% gross margin gives you a weighted gross margin of 6.5%. You can add those three together because then they're against the same number, if you will, against 100% of sales, so they're equivalent. You can come up with a total gross margin for the dealership of 19.5%. On the next slide, then, I'm going to show you some dollars to show you how that's correct. Take a look at this. I'm going to put $50 million in total sales against these percentages. What that does then is $10 million from the parts department and $5 million from the service department at the relative gross margins. That gives me $3.5 million in gross margin from sales, $3 million in gross margin from parts, and $3,250,000 from service. Service only had 10% of the sales, but look at this. It had gross margin essentially equivalent to all the other departments. When you look at it, the departments are roughly equivalent, 7% of our gross margin of 19.5%. It's not 7% of 100, it's 7% out of 19.5 came from sales, 6 of the 19.5 came from parts, and 6.5 came from service and film system. I'm sorry. I just switched to Spanish for a minute. We have a total gross margin of $9,750,000. What happens if we're going to increase that by $500,000, let's say 10% in the service department? It's only a 10% increase in our service sales, which gives me an increase from $5 million to $5,500,000. With each dollar essentially of service sales, there's going to come a dollar of parts sales. I'm going to increase my parts sales as well by $500,000. That's going to change my mix a little bit. Look at that. Notice that I'm not changing anything from the sales department. The sales department is still providing $35 million in sales and $3,500,000 in gross margin. My gross margins have now increased in both the parts department and the service department. If you look at my weighted gross margin, I'm now getting 6.2 out of the parts department and 7% out of the service department. Look at this. Before it was 6 and 6.5, now it's 6.2 and 7.0. My total gross margin is now at 20%, whereas before it was 19.5%. A little bit adds a lot. We're very important in the parts and service departments. We actually had a gross margin increase, and that's gross margin, which is profit, which pays expenses of $475,000 from just a 10% increase in the service department. That's why it's so important, and that's why it means a lot. We are actually as important individually, parts and service, as the sales department is when you compare us to the total dealerships gross margin, and gross margin dollars is what we use to pay our bills. Let's talk about absorption now. What is absorption? I'm sure you've all heard about it. I'm sure you probably track it, but absorption is the extent to which the dealership total expenses are covered by the gross margin dollars from the parts and service departments. Can you pay the dealership's expenses strictly out of the gross margins from parts and service? The formula then is the parts gross margin plus the service gross margin divided by the total dealership's operating expenses plus interest expense. Some absorptions will not include the interest expense because they don't consider it an operating expense. They consider it a financial expense, but for a pure absorption, you want to include it because you have to pay your interest expense. The people that loaned you the money expect to get paid back. The guideline with this is 85% to 100%. Obviously, if you're not going to include your interest expense, your guideline is going to be greater than 100%, but I'm going to go with 85% to 100% because I'm including interest expense. What does high absorption really mean, then? It means a couple of things. The first one and most important, it means a better ability to withstand a downturn because in a downturn, whole goods typically falls off faster than parts or service and it falls off farther, so if you can cover your dealership's operating expenses out of parts and service, you don't go broke or you don't get bought out by another neighboring dealer when it turns down, but it also means that if you've got extra profitability, there's no such thing as extra, but if you've got more profitability from parts and service, you can better able to go after some maybe low margin whole goods sales that you wouldn't be able to go after, and once you get those whole goods sales, they're going to drive more parts and service business, which is a profit spiral, which then benefits you overall, going to allow you to have more parts and service dollars, going to allow you to make more money, going to allow you to have better absorption, so absorption is a good thing, high absorption. Let's talk about return on assets. Return on assets compares your profit to your assets, and in this case, it's a total dealership calculation. Assets are everything that the dealership owns, whether it be everything from the dollars in the bank to the trucks to the buildings, it's everything that you own, it's on your balance sheet, so then what you want to use this for is to determine if you're making sufficient profit to justify your investment, this is something the owners are going to do, they've got various places they could go with their investment, the dealership is where they've chosen to put it, but when they want to compare, they want to compare return on assets and return on equity, which means the amount of money they've put in, to what could they earn somewhere else? Well, the thing about return on assets is because this is a capital intensive business, you've got to have a lot of assets to make money, big buildings, a lot of land, a lot of rolling stock, and a lot of inventory, it takes a lot of dollar investment to be able to justify it, so what you have is you've got to have a sufficient profit off of this, and return on assets lets you know how efficient you are at using those assets to create profitability. Your guideline for this is a minimum of 15%, the value of your assets, the profit against the value of your assets, you should be getting at least 15% or more, so it's a net operating income divided by the total assets. Let's give you a little quick return on assets exercise, let's say we had to write down these numbers if you want, and do the math along with me, $750,000 in net profit, and a $10 million in total assets, what that will give you, then do your division here, $750,000 divided by $10 million gives you 7.5% return on assets, is that above or below the guideline? It's below the guideline, it's below the guideline of 15%, in fact it's only half of the guideline, so what do you need to do if you're below the guideline here, you need to either raise your profits or reduce your assets, well raising your profits is a challenge to do quickly because you either have to have a price increase, you have to start selling stuff for more than you've been selling it for without raising your costs, or you can reduce your assets, which means don't have as many assets to be able to justify the same dollar of sales, typically when you've got this, it means that sales have declined, or you've got new stores, an excess of assets, or you've got an excess of inventory and a downturn, what you're trying to do is you're trying to reduce your assets, but it's difficult to do quickly, and that's why you have to pay attention to your return on assets over time, because as your assets, if they're too high, you're not going to be able to get your sufficient return. Now remember in service, our inventory is time, so we're not impacting the asset side of this calculation, but in the parts department we are, because our parts inventory is probably the largest paid for asset that the dealership has, but both of them, parts and service, both impacted with a gross margin because we have significant gross margins, and that significant gross margin is going to be folded into the profit side of the calculation, so we and parts and Service are expected to contribute significantly to the return on assets calculation. Let's talk about turnover. What is turnover? Inventories. Inventories are sold or turned over to produce revenue. What is inventory? In the Parks Department, it's your parks. It's the parks that are on the shelves. In service, what I say your inventory is, it's time. Time can't be not put on the shelf. So you don't have one in the service department. So you don't have an inventory turnover calculation. So in parks, it's your total park sales divided by your average inventory. Why average inventory? Because if you, and I'd say average of the last 12 months, because inventory will rise and fall during the year. And it's a snapshot, a point in time number. Whereas your sales is a cumulative number as the year progresses. So you wanna take your rolling $12 sales, not just your year to date sales, but your rolling $12 sales and compare it to the average inventory, the average ending inventory of the last 12 months. And that'll give you a realistic turnover number. Now in the Parks Department, we've got active parks turnover, and we've got something we've come up with. It's called true parks turnover. What is active parks turnover? Active parks, you've got total turn, active turn, and true turn. Total turn is just everything that's in the Parks Department. And that is your most realistic number. But if you wanna see how well you're doing with certain other calculations, it's take your active parks. An active park is one that has sold in the last 12 to 18 months. Myself, I use 12 months because I found that after 12 months, a park tends not to sell unless it's a brand new park that you've stocked for a new machine because the manufacturer expects you the park to stock it before they'll ship you the machine. If it's another park that you had and it doesn't sell in 12 months, it's dead and you better find a way to get rid of it. But active parks are those parks that are selling that have activity. That means that this number is going to be lower, the value of the inventory, and therefore your turnover is going to be higher than your overall parks turn. True parks turn says, okay, am I really selling it out of my stock? Because that's what you really wanna do is sell it out of stock. That is when you take your active parks turn and you multiply that times your stock order percentage. And that's going to give you a little bit lower number, but by multiplying it times your stock order percentage, it essentially says this park was in stock and therefore it was sold out of stock, which is the best possible scenario for customer satisfaction and for the service department. So which is better? They're all good. They just have to know what you're measuring. I like total turnover because it's the actual figure and lets you know how inefficient you are or efficient you are. Total parks turnover should be about two and a half times. So what you're going to take here, let's say I've got an example here that I'm running through. Total parks turn, let's take $1,700,000 of inventory, gets you a total parks turn of 2.43. But your active turn, because only 630,000 of that was active, had sales, means I had $70,000 that was sitting on the shelf that's not selling. It's not doing me any good or the customer any good being on the shelf. I don't get any customer satisfaction out of it. It's wasted money. It's burdened money. It's a lot like throwing it away. However, I know it's hard to throw it away. You need to throw it away, especially before you go buy more Bidmars or put more roof over more bins. Space is expensive. It's expensive to count the parts. It's expensive to manage the parts. If you're not going to sell a part, the part's going dead, you need to get rid of it. Take the hit on your profitability, which is fine because in a good year, you need to burden that profit somehow and so you don't pay taxes on it. You're actually not going to be selling this part anyway. So to active, that's my little speech on that if I was going to do a parts seminar. Active parts turnover has gotten me a little bit higher because you're using a lower inventory value against the parts that are selling because it's realistic. You didn't sell that under 70,000 to contribute toward that 1,000,007 in sales. Let's take true parts turnover. Let's take that 1,000,007 divided by 630, which was my active parts, but my stock order percentage was 85%. So only 85% were ordered on a stock order. It's an active part. If I ordered it on a machine down order and sold it, it's considered an active part. It just wasn't in stock. So it helped my active turnover, but it did not help my customer satisfaction because I didn't have it on the shelf. So multiplying it times 85% said my true parts turn is really 3.17. So it's a higher turn. My guideline for total parts turn, it's between two and a half and three. Why is it a range? Well, turnover too low. What that means is I've got too much capital tied up in my inventory for my level of sales. I could use that capital elsewhere. Now it could be dead inventory. So it's not helping me at all. But if it's inventory that is selling, then I really don't need that much inventory. It's too much safety stock. And what I need to do is not replace that stock as I begin to sell it off, lower my safety stock and use that money elsewhere. Or if I'm gonna use it in the parts department, use it to stock a wider breadth of parts that maybe had some lower sales because that's going to impact my customer satisfaction more because it's going to increase my active turn. But the other thing is a turnover that's too high. Can it be too high? Well, financially, the CFO loves to see a high turn because it means you're not having very much inventory or tied up to produce the level of sales that you're getting. But what it could mean is that you're turning that inventory and customers are coming and asking for parts that you don't have and they're walking away. So you could be missing sales. That's why we cap it at 3.0 as a guideline for total parts. Once you get above that, you may be missing sales. The key is that the closer to one is to the other, the better, because if your guideline for total parts turn is two and a half to three, and your total is equal to your true turn, that means that you've got it on the shelf and you're buying it on stock order. It's never gonna be equal, but the closer it is, the higher customer satisfaction you're going to have because it means the more that you're selling out of stock. Let's talk about sales mix for a minute, your parts contribution. Sales mix is what percentage of the dealership sales come from the parts department in this case or the service department for the service sales mix. The formula is your parts sales, we're just gonna talk the parts right now, divided by the total dealership. And for the service, it's separate, the service sales divided by the total dealership sales. So it's divided by total dealership sales, not just the service department sales. Your parts guideline is 20 to 25% of the dealerships sales should be coming from the parts department. And for service, 10 to 15% of the total dealerships sales should be coming from the service department. But missing that guideline doesn't automatically mean that you've got poor performance, it could mean some other things. It could mean that you've got a new store where you've got low population and you're trying to build a population, it could be a machine population situation, it could be where you've got an upturn in the economy and the whole goods sales have taken off and the parts sales are going to lag a little bit, the service sales are gonna follow them, lagging a little bit. So it could be a number of things, but it should stay within this range and it should be catching up. If it's not in this range, it should be turning toward that range. And if it's not, marketing is an obvious fix. If it's below the range, then you need to look at your marketing programs. On the service side, you need to make sure that you're filling the shop, that you've got enough hours of labor lined up to keep your service technicians busy all the time. And on the parts side, you need to make sure that you're running specials or that you're reaching out to your customers or that you're doing other things to make sure that you're getting the parts business that you serve. So let's do a quick little analysis here. Grab your calculators and start dividing here to say, I'm gonna do a parts contribution calculation here, little analysis that says my sales for year one, year two, year three, year four, year five are $12 million in the dealership against 2,000,008 in the parts department. So let's go down the total sales, go to 13, back to 12, 12, six, up to 14, seven. The parts sales are 2,000,008, 2,000,007, 2,000,004, 2,000,001, 2,000,002, little rebound. What's gonna happen there? Take a look at this and say, look at the percentages. When you start looking at in percentages, you can then begin to compare one period to another. And that's why you wanna turn these into percentages. My parts percentage or sales mix was at 23.4% in year one, but it went down to 20.6, to 20.4, to 16.5, to 14.9. On average, it's been 19. But my trend is obviously going in the other direction. So 19 is sort of irrelevant here. What I'm worried about here is I'm going in the wrong direction. Parts are below the 20 to 25% benchmark and they're declining, and they're declining. So what that means I need to do is I need to initiate marketing programs, but something else is wrong here too. Why? Because the whole goods sales are not following the same trend. And that's where you wanna start looking at dollars and values to be able to identify trends. What's happening is my whole goods sales have been going down. So the market's not been good, but my parts sales have been going down even more. So I've got something going on here. I absolutely do need to have a marketing program, but there's fundamentally wrong here. And if it's the service department and the service sales analysis, you need to look at the same thing. What will be driving people away from the dealership? Have I got to train my people? Have I got fewer people in the service side? Do I have not enough technicians? Have I laid off some technicians as the economy got bad? Have I not replaced those technicians? What's going on? You need to look at this fund. Something fundamentally here is different than it was. And the numbers don't tell you what the problem is. It just tells you that you have a problem. So let's look at sales trend or sales growth. My parts department should grow at 10 to 15% per year. So am I growing at 10 to 15% per year? What do you want to do is you want to use marketing programs to drive your growth. You want to work closely with your service department if you're in the parts department to make sure that you're growing because your service department is your best customer. And you want to train your people. What do trained people do for you? Well, your best marketing program in the parts department is a well-run parts department. Well-run parts department, it means that it has parts employees at the counter that are educated, that know how to look up parts, that know how to identify parts, that know serial number breaks, that know attachments, that know the questions to ask. There's a lot to know, and there's a lot to know in products. There's a lot to know about how to recommend fixes. If the customer is doing their own labor, you want to say, you want to do a suggested selling. Remember that when you're in the machine, you're going to need to have this kit, or you need to make sure you have the new gaskets. You want to make sure that if you're doing this, you need to be looking at this other component while you're in there. Suggest these to the customer because it's not overselling the customer, it's helping the customer make good decisions because the customer doesn't do this repair every day. The customer may not know there's a kit, the customer may not know this other information, and your parts department employees, they rely on your parts department employees to help them make good decisions in the repairs. And then if it gets too complicated, obviously your parts counter person can just say, listen, we can talk to our service department and see if we can get that in, or we can have someone come take a look at it and give you a quote. Because you can do the parts, you can buy the parts and do it yourself, or we can give you a quote. Well, on the service side, your benchmark is the same. It should be 10 to 15% per year. But remember here, rate increases on either side are not the answer. You're gonna get a couple more percent on the parts side every year, hopefully because of inflation, but that's not your solution. And on the service side, raising your rates are not the solution, why? Because the market determines what your bill out rate's going to be. The solution is what percentage of your payroll hours are ending up on revenue work orders. That's what you've got to look at. It's not just what percentage you're getting billed out, but what percentage of them are going on revenue work orders because revenue work orders can be internal to the sales and rental departments. It can be external for the customer, or it can be warranty. But these are all revenue generating, and you need to know what percentage of your payroll hours are going on revenue work. Then what percent of those hours that are on revenue work are getting billed out onto an invoice? The first side is I don't have enough work. I'm not busy enough. I've got to fill my shop. The second side that says what percentage are going onto invoices says, for some reason, I'm writing off hours. I'm not efficient. You can either start a standard charge program, put an incentive program with it or not. A standard charge program, just by giving your technicians a goal will increase efficiency and will increase your revenue recovery. Believe it or not, just having an idea. The other thing you can do is you can make sure that they don't spend time waiting between jobs. Make sure they know there's another job waiting for them because then they will finish this job. A technician will tend to fill the space that they think is available to do that job with the time it takes to do that job if there's no benefit or reason to do it in a faster time. So you need to give them an expectation. And if you have an actual standard charge billing system, that's the best way to do it. Think about it this way. Get your pencil and paper. I want you to do this on the service side right quick. Five minutes a day. I say here that 12 minutes a day waiting for parts is a 2.5% difference in billed hours per year. That's 25% of your 10% increase. But what does it really cost you? What's five minutes? There's 60 minutes in an hour, right? And 60 times eight is 480. So there's five, essentially 500 minutes in a day. So five minutes is equal 1% of a day. How many hours are there in a year? There's 2,080 hours, rounded off for vacation. And there's 2,000 hours in a year. What's 1% of that time then? 1% of 2,000 hours that you're paying your technician is 20 hours, 1%. So if you waste five minutes a day waiting for parts, looking for a special tool, wandering around, talking to someone else, waiting before you go to work, waiting for instructions on what your next job is, five minutes is 20 hours a year. At $100 an hour bill out rate, that's $2,000. And we already said that cost of sales is your salary. So your salary doesn't increase by increasing that bill out. So if you can grab five minutes a day from each technician, you've just put $2,000 to your bottom line in the service department. Now, why do you think if you're in the parts department that the service department gets so upset when you don't have the part on the shelf? Because five minutes a day waiting for a part that a technician could be doing something else, could be working on a job, is gonna cost $2,000 a year in profit. And if you are together on an incentive program where you're paying some kind of incentive based on the total contribution from each of you, then that's $2,000 that's being taken away from the bottom line that could be going into your incentive. Let's talk about fill rates. Parts fill in the parts department is the percentage of parts sold that comes straight out of your inventory, delivered out of stock. That's parts fill all. You've also got your parts fill stock. What is that? Well, that means that what percentage was out of it that you decided to stock. So this is a stocked part. Now, you've got your business and your total support for customers and for your service department. Dealers like to talk stocked because it's a higher percentage. Well, I'm only stocking this part and I'm producing 92 to 95%. Well, if you've decided to stock the part, you should have 100% of it in stock. You should be filling it 100%. What are lost sales then? A lost sale is a part that would have sold. The customer asked for it and you didn't have it in stock. So the customer decided not to buy it. They went elsewhere. So you lost that sale. Most dealers don't track that. The manufacturers push you to track it because that will allow you to see what your actual demand is for that part. And since your stocking parts based on calculated demand, which is gonna be the judge of your future demand, then that is something that you need to take into account. So you do need to be capturing your lost sales. It just depends on how do you do it in your system. Add that to your demand and that's gonna improve your stock order percent. So parts order fill percent is a percent of the parts orders that can fill it 100%. So what is this? Order fill. That is if you take a parts order, did you fill every part that was on that order? Why is that important? And because if you don't fill all the parts, you don't count that as an order that was filled. Because waiting for one part out of a total order can slow down a job. That means that communication is absolutely essential. How are you gonna get that part? I've run into situations both with myself and with other dealers where the parts department, it'll be a big part, it'll be heavy. They'll decide they wanna get the stock order percentage discount or they wanna save the freight. So they'll go ahead and they'll put it on a truck freight or a stock order freight to be able to get the discount. But the service department was waiting on it and expected it to come machine down. Obviously, if it's a high dollar part or a heavy part, you need to have a conversation about that. Because if it is that, then help the customer make that decision. Give them the opportunity for them to decide, well, I can wait for this machine for another day because I don't wanna pay that money. Let the customer in on that conversation because order fill is important. Most dealerships don't track it because the business system doesn't track it because it's difficult to track and it never was put in the business system. What is my sales per employee? That says, it's an evaluation that says, based on the number of employees that I have, compare that to the dollar of sales that I've got. And it says in the parts department, what is my total sales against the total number of parts department employees, not including the parts manager. What are my benchmarks? I should be getting out of a small tractor utility dealership, $400,000 in sales per employee. Light construction, $600,000. And heavy construction, about $800,000 of sales per employee. Now, this is a generic benchmark. You can be over under that. Some of you will have an extra employee depending on the size of dealership you are. That may be multi-store and you may have someone in your dealership if you're the central location that's stocking, that's shipping and receiving for multiple dealerships. That's gonna drive your cost up or number of employees up compared to the other stores. So it's gonna impact your dollars. Take that into account as you do these numbers. But these are essentially benchmark values that you should be able to use. And that's a parts department number. KPI for customer satisfaction. What is customer satisfaction? Well, it's not financial, but it impacts your financial. So it's extremely important. It's about five to 10 times more expensive to attract a new customer than it is to maintain an existing customer. The CSI then is a numerical indicator of the customer's satisfaction with you. You do this by having surveys. You wanna do a survey because you've got to reach out and touch the customer because essentially if they're dissatisfied, they're gonna tell everyone but you. And why do they leave? Because when we do surveys, typically what the answer is, I felt like no one really understood my needs or cared. And that's why they leave. It's so easy to change that. All you need to do really is reinforce the customer relationship with your people. You do this by training them. You do this by making sure that they're aware of the customer. What is your total lifetime value of a customer? I don't have this in an example, but I have one made up here for you. If you can write these down, let's just take a quick look at this. Let's say a customer is 35 years old and they're gonna be in business till they're 65. They got 12 machines. They have 12 machines. And they're gonna trade two a year at $70,000 each. They do about $15,000 in parts and $8,000 in service a year. So what does that mean? It means 60 machines over the life of the machine at $70,000, that's $4.2 million in machine sales at a 6% gross margin, which is low. It means $252,000 in gross margin revenue to help pay the bills. Out of parts, that'd be 30 years at $15,000 is $450,000 in revenue. At a 30% gross margin is $135,000 of gross margin revenue. For service, 30 times $8,000 is $240,000 in gross margin at 65% is a $156,000 of actual gross margin. So you've got lifetime sales of $4.9 million for one customer and $543,000 in gross margin profit from one customer. That's the lifetime value of an individual customer with 12 machines. That's why it's obviously important that all of your customers feel that you're interested in them. So let's talk about how do you get your customer your dealership employees interested in the customers. What you need to do is you need to make sure that you've got an action plan. When you do an action plan for your employees make sure that you follow the SMART format. Here I've got the SMART format and I'm gonna go over that with you. You see the form here and I can send that to you. You can talk to AED, talk to Rebecca, send me something, I'll give you my information. I can send you this form to use at the end if you need to. But first, S is for specific. What is the specific target or gap that you wanna close? What do you wanna do? What do you want this employee to do? And this can be whether it be a gross margin, whether it be a sales goal, whether it be something for a customer satisfaction, taking a course. What is the actual activity that you want this specific person to do? Measure, how are you gonna measure it? What is the measurement that's going to take place? What report are you going to use? If it's gonna be a sales goal, where do you crack it? So if the specific goal was to increase your sales mix by 3%, what is the action that you're going to take to do that? Are you going to start a standard charge system in the service department? Are you going to have a quarterly marketing program in the parts department? What is the action that you're going to take? Responsibility, who's responsible for each of these activities? Because you're gonna have an action plan for the dealership, for the department, but you're also gonna have one for individuals. What is their specific impact? What is their responsibility? What's their action and who? If it's a group goal, then you absolutely have to have it. Who is responsible for each of the activities? Who is responsible for doing this? And timing, what is the timing? What is, when's it going to be done? What's the due date? What's the due date on this specific action? When you do this, then you're going to have a manner for being able to identify who, what, when, where, and how are you going to do it? Stephen R. Covey wrote a book 30 years ago. It's still one of the Bibles of this, of managing your time and being active. The Seven Habits of Highly Effective People. If you haven't ever read it, you need to. What Stephen Covey said is that time management is a comprehensive process that goes far beyond schedules, appointment books, or even the management of priorities. What it comes down to is choosing between acting and reacting. He has a quadrant that he puts on here and it's called the urgent or important quadrant. As you can see, as you move up these quadrants and go higher on it, it means a task is more important than the lower task. If you go from right to left, it means that they're more urgent. Quadrant one means more urgent. Quadrant two means it's less urgent, but just as important. Quadrant three, which is in the lower left, means it's not very important, but it's urgent. People are asking you to do this. And quadrant four is not urgent, nor is it important. He gave names for this. Quadrant one is fireman. About 50% of your time is taken here. Quadrant two is leadership, and you need to spend at least a third of your time being a leader, because as you spend your time in the leadership quadrant, and look at the things that are on here, it's setting budgets, it's planning priorities, it's training people. What you'll find is that you're spending less time in quadrant one, because what's happening in quadrant one, you're having to be the one to take care of problems. As you move to quadrant two, there will be fewer problems because your people are taking responsibility for these. Quadrant three, the bottom left, you're being a drifter. It says that these things are urgent. People are asking you for their time, but they're not very important. It's phone calls, it's things that are coming up that you think you need to take care of. This is things that you need to give to other people. These are things that you need to delegate. This is how you develop other people and let them become managers. Quadrant four, stay out of it. We call this nice guy, but it's not being nice guy. What it's being is being unproductive. It's the unproductive manager. And what you need to do is recognize when you're going into that quadrant and just stop it. Stop it. Don't go there and don't let these things occur to your other people. So I've burned my hour. I'm at 58 minutes right now. So I've left a whole two minutes for you to ask questions. If there are any questions, you can go ahead and type information on here. Otherwise, I really appreciate your time. This has been great doing this thing. I want you to use this information. That's why we do this. My name is Bill Mays. I'm with Mays and Calero. My number in the U.S. at which you can reach me 24 seven 365 is 913-579-5188. I live in Costa Rica. I'm doing this from Costa Rica right now. I'm at 506-846-58148. So give me a note, give me a call, and let's make it happen. So thank you very much. And we'll talk to you somewhere on the flip side. Bye.

KPIs

parts and service department

tracking

gross margin

sales contribution

inventory turnover

customer satisfaction index

CSI

absorption